ABSTRACT: In a speech delivered in March 2011, Commissioner Almunia indicated a concern that EU merger control, in contrast to some national merger control regimes, is unable to investigate minority equity stakes as mergers.He has instructed Commission staff to consider this "gap" in enforcement and whether it needs to be closed. As a result, the European Commission, in November 2011, announced its intention to conduct a study on the economic importance of minority shareholdings in the EC economy and on the need for the Commission to have the power to review the purchase of minority shareholdings.

The interest in this topic appears to have been ignited by the Ryanair/Aer Lingus merger case, which was blocked by the Commission in 2007, a decision subsequently upheld by the General Court in July 2010. However, the Court also agreed that the Commission was powerless to investigate the 29 percent equity stake that Ryanair continues to hold in Aer Lingus. In contrast, the Office of Fair Trading ("OFT") in the United Kingdom (which, along with Germany, is a Member State with powers to consider acquisitions that fall short of control) has announced an intention to investigate that situation-though currently its attempts to do so have been held up by a legal challenge concerning the long time delay that has elapsed since the Commission Decision. The OFT's desire to review the minority stake in Ryanair/Aer Lingus has nevertheless raised important issues about both jurisdictional and substantive analysis in such acquisitions.

It is clear that, in theory, minority shareholdings that fall short of conferring control are capable of reducing the incentives of the parties to behave independently of their competitors and can thereby harm consumer welfare. There are three quite separate mechanisms whereby this might occur: First, acquiring a shareholding of a competitor may change the competitive incentives of the acquiring firm. Absent such a shareholding, an increase in the price by the acquiring firm that resulted in a loss of sales to the target would be one of the factors that would discourage such an increase in price. After the acquisition, however, some of that customer loss will be re-captured by the acquirer ("internalized" in its price setting decisions) through its shareholding in the target firm. As a result, the acquiring firm might choose to raise its prices unilaterally. Second, the acquisition of a minority shareholding may, even absent control over the target, enable the acquiring firm to influence materially the decisions of the target company in relation to key competitive parameters such as price, quality, or strategic expansion so as to confer a competitive advantage on the acquirer's other interests in the market. As a result, the acquiring firm might succeed in forcing the target firm to harm its own commercial interests by competing less effectively, to the benefit of the acquiring firm. Third, cross-shareholdings across companies could also, in principle, facilitate coordination between competing firms if they enable information sharing in respect of confidential market information, or increase the ability of the acquirer to influence the target's competitive strategy. The potential adverse outcome in such cases would be a general (collusive) increase in the prices of both firms. However, the mere fact that minority shareholdings could give rise to such effects is not sufficient to establish that the EU merger regime ("EUMR") must be changed to fill this gap. Rather, the justification for closing any enforcement gap should be informed by a practical judgment that the potential concerns identified are sufficiently material to warrant intervention, when set against the costs of so doing. These costs will include increased resource implications for competition authorities and regulatory burdens on businesses, which will be necessarily higher under the EUMR's system of mandatory notifications than, for example, the U.K.'s system of voluntary notification. In addition to the additional resource costs, extending jurisdiction beyond the clear-cut threshold of control to rather more nebulous "material influence" tests would add substantially to the regulatory uncertainties in merger assessment.

Given this background, this paper discusses the economic framework for assessing acquisitions of minority shareholdings and its implications for the appropriateness of widening the Commission's powers to intervene in acquisitions falling short of control. Since minority shareholdings are substantially less likely to give rise to competition concerns than fully-fledged mergers, and since the assessment of such concerns is likely to involve a high degree of subjectivity and create substantial uncertainty, we are skeptical that any such extension of EUMR powers will create a more effective EU mergers regime.

ABSTRACT: Competition and good governance are closely related. When competition law and corporate governance intersect, it is important to be sure that the overlap gives rise to consistent policies. This paper identifies two major areas of intersection concerning minority shareholdings. The paper finds that competition law yields outcomes consistent with corporate governance standards and, at limited times, may provide an alternative path to enforceable standards of good corporate governance. Corporate governance rules are likely a more complete way of addressing distortions of competition that arise from related-party transactions than competition law. Nonetheless, somewhat surprisingly, competition law may have some role to play in cases of related-party dealing to purchase at above-market prices. In some circumstances, competition law may even provide firmer guidance than laws on corporate governance.

The first overlap between competition law and shareholding structures occurs when a common owner has shareholdings in multiple competing companies. The second occurs when a company in a group purchases from a related company (often in the same group), even when better deals for supplies could be found outside the group. On the one hand, minority shareholdings, even at a level of less than 20 percent, can create positions of influence that can merit treatment under merger review for potential lessening of competition between competing companies that are linked via a minority shareholding in one of them. This treatment of minority shareholding emphasizes that some minority shareholders may influence important business decisions. Minority shareholding can be an important factor to consider when assessing whether a merger review situation exists.

On the other hand, minority shareholders may be penalized by holders of decisive influence (including by minority-shareholding management) via anticompetitive procurement practices. Procurement and disposition practices by corporations can be intended to favor some controlling parties to the disadvantage of any minority shareholders without material influence over procurement. That is, procurement and disposition by private enterprises may be designed to reallocate corporate profits or value away from one company towards another with a high ownership share by shareholder/managers of the first company. This procurement distortion is more severe in the presence of interlocking shareholdings across distinct business enterprises providing services and products to one another, as may be more common in small and less developed countries with few major economic actors.

This paper examines how minority shareholding interacts with competition and governance in one small emerging economy (Mauritius). The paper seeks to identify those competition policy problems that are related to minority shareholdings and merit competition law consideration. While the country experiences described are those of a small country, the issues outlined in this paper are nonetheless of broad relevance, reflective of behavior that can be found on occasion in the large, developed economies.

ABSTRACT: Over the past decades behavioral economics has gained widespread consensus, and, as a consequence, is affecting many areas of law and economics. Antitrust is currently providing an interesting case-study of this new cultural-academic wave, with a growing number of articles and comments focusing on 'behavioral antitrust'. This paper provides a concise survey of the current state of the art, aiming at better understanding the qualities of the new behavioral approach to antitrust (taking predatory pricing as an explanatory test), and, at the same time, considering its limits. Final considerations are dedicated to the need to go beyond the ongoing 'label battle' in order to set up a credible frame of reference-knowledge to be used when dealing with antitrust, in view of reaching a sound cognitive approach to the discipline.

ABSTRACT: We use T-100 traffic data and DB1B fare data from the U.S. Department of Transportation to identify patterns and effects of entry by network carriers and low-cost carriers in non-stop U.S. airline markets. For the sample period from 1996 to 2009, we find that entry activity of low-cost carriers did not only experience significant absolute increases but also led to substantial fare reductions. As route entries by network carriers do not have comparable effects, the existence and expansion of low-cost carriers must be considered as the main driver of competition in the domestic U.S. airline industry.

ABSTRACT: This paper proposes fully nonparametric tests to detect possible collusion in first-price procurement (auctions). The aim of the tests is to detect possible collusion before knowing whether or not bidders are colluding. Thus we do not rely on data on anti-competitive hearing, and in that sense is ’ex-ante’. We propose a two steps (model selection) procedure: First, we use a reduced form test of independence and symmetry to shortlist bidders whose bidding behavior is at-odds with competitive bidding, and Second, the recovered (latent) cost for these bidders must be higher under collusion than under competition, because collusion dwarfs competition, hence detecting collusion boils down to testing if the estimated cost distribution under collusion first order stochastically dominates that under competition. We propose rank based and Kolmogorov-Smirnov (K-S) tests. We implement the tests for Highway Procurement data in California and conclude that there is no evidence of collusion even though the reduced form test supports collusion.

ABSTRACT: This paper develops the incentives to collude in a model with spatially separated markets and quantity setting firms. We find that increases in transportation costs stabilize the collusive agreement. We also show that, the higher the demand in both markets the less likely will collusion be sustained. Gross and Holahan (2003) use a similar model with price setting firms, we compare their results with ours to analyze the impact of the mode of competition on sustainability of collusion. Further we analyze the impact of collusion on social welfare and find that collusion may be welfare enhancing.

Bernhard Ganglmair (Jindal School of Management, University of Texas at Dallas) and Emanuele Tarantino (Department of Economics, University of Bologna) address Patent Disclosure in Standard Setting.

ABSTRACT: We present a model of industry standard setting with two-sided asymmetric information about the existence of intellectual property. We provide an equilibrium analysis of (a) firms' incentives to communicate ideas for improvements of an industry standard, and (b) firms' decisions to disclose the existence of intellectual property to other participants of the standardization process.

ABSTRACT: The debate about the antitrust treatment of minority shareholdings and interlocking directorships is certainly not new. The European Commission did, however, re-open the discussion earlier this century in its 2001 Green Paper, when considering the reform of the Merger Regulation that led to the adoption of the new European Merger Regulation ("EUMR").

This debate has been reactivated recently following the Ryanair judgment of the General Court, which narrowed down the possibilities to apply the EUMR to the acquisition of non-controlling minority shareholdings. In light of this judgment, the Vice-President of the European Commission (the "Commission") and Commissioner responsible for competition, Joaquín Almunia, announced, on March 10, 2011, that the Commission will consider again whether there is a gap in the assessment of minority shareholdings and "see whether it is significant enough for us to try and close this gap in EU merger control."

This paper briefly summarizes the European Union's approach to minority shareholdings and interlocking directorships both from the merger control (EUMR) and antitrust perspectives (Articles 101 and 102 TFUE). In order to do so, the paper starts with a summary description of the main possible anticompetitive effects of minority shareholdings and interlocking directorships.

ABSTRACT: This paper studies the potential effects of vertical integration on downstream firms’ incentives to innovate. To interact efficiently with suppliers, firms may have to provide sensitive information which, if disclosed to rivals, could facilitate imitation. We show that, by altering the supplier’s incentives to protect or exploit its customers’ information, vertical integration degrades the supplier’s ability to interact with downstream competitors. This leads to input foreclosure, raises rivals’ cost and limits both upstream competition and downstream innovation and development. A similar concern of customer foreclosure arises in the case of downstream bottlenecks.

ABSTRACT: We analyze a successive vertical Cournot oligopoly model with homogeneous intermediate and final goods. Under restricted entry in both upstream and downstream markets, the input price continuously falls on a sequential merger path. Partial input foreclosure never occurs. However, when there is free entry in the upstream market, we find that the input price initially falls but eventually rises as incremental vertical mergers occur. Thus, under upstream free-entry equilibrium, the possibility of partial input foreclosure arises.

ABSTRACT: Two-period Cournot competition between n identical firms producing at constant marginal cost and able to store before selling has pure strategy Nash- perfect equilibria, in which some firms store to exert endogenously a leader- ship over rivals. The number of firms storing balances market share gains, obtained by accumulating early the output, with losses in margin resulting from increased competition and higher operation costs. This number and the industry inventories are non monotonic in n. Concentration (HHI) and competition increase due to the strategic use of inventories.

ABSTRACT: This paper examines whether retailer bargaining power and upfront slotting allowances prevent small manufacturers (who have no bargaining power) from obtaining adequate distribution. In contrast to the findings of Marx and Shaffer (2007), who showed that all equilibria involve limited distribution (i.e., exclusion of a retailer), we show that there is always an equilibrium in which full distribution is obtained, provided that full distribution is the industry profit-maximizing outcome. The key feature leading to this differing result is that we do not restrict each retailer to offering the manufacturer a single tariff.

ABSTRACT: What is the best way to reward innovation? While prizes avoid deadweight loss, intellectual property screens out projects generating low consumer surplus per unit sold. We propose a stretch parameterization of demand under which innovations dier in both the size of the market they create and consumers' average willingness-to-pay for them. We solve the resulting multidimensional screening problem by decomposing the analysis into a separate choice of the level and structure of rewards for innovations. Optimal policy generally calls for some market power but never full monopoly pricing. The appropriate degree of market power is determined by a value-weighted average of the innovation supply elasticity multiplied by the log-variance of the ratio of the monopoly prices to quantities, opening our analysis to empirical calibration. Our results also shed light on the pricing of platforms, incentives within rms for product development and public infrastructure.

ABSTRACT: This paper presents an empirical assessment of the degree of competition within the Jamaican banking sector during the period 1998 to 2009. We employ a dynamic version of the Panzar-Rosse Model to estimate market power among the sample of banks that constitute over 90 percent of the banking market. Using the conventional statistical tests, we are unable to reject monopoly/perfect collusion for the merchant banking sector in Jamaica but find competitive conditions in the commercial banking sector. This contrasts with earlier findings using alternative estimators that find monopolistic competition in the market as a whole

ABSTRACT: In this paper I review the key aspects of the new anti-manipulation and anti-fraud rules of the U.S. Commodities and Futures Trading Commission implemented last summer, representing a significant expansion of the Commission’s enforcement authority. I argue that the role of the economist may consequently be increased, not only due to the expanded set of activities covered by the new rules which will likely lead to more cases, but also due to the lower burden of proof for charges of fraudulent and manipulative practices. These lower standards will require more elaborate, more in depth, and more creative economic and empirical analyses by defendants’ experts.

The paper starts by reviewing some classical manipulation and alleged manipulation cases, emphasizing the role of the economist in general and of empirical analyses in particular. It then describes the power of empirical screens to flag anticompetitive behavior, and summarizes the Commission’s market screening and monitoring program. I use as an example of the power of these empirical approaches the alleged Libor manipulation and conspiracy currently under investigation by the Commission and other agencies worldwide, which was originally flagged by screens. After establishing the power of empirical screens to detect potentially illegal behavior, I proceed with two hypothetical examples of how empirical analyses may be used on the other side, to defend against allegations of fraud and manipulation. I conclude the paper with an example of an innovative approach to screening for manipulation developed by economic experts on behalf of defendants, which was successfully used to assist in establishing the lack of conclusive evidence of price artificiality and the absence of a material manipulation in a private litigation matter.

ABSTRACT: This paper attempts to evaluate the competitiveness of British banking in the presence of cross-selling and switching costs during 1993-2008. It presents estimates of a model of banking behaviour that encompasses switching costs as well as cross-selling of loans and off-balance sheet transactions. The evidence from panel estimation of the model lends support to our theoretical priors on the cross-selling behaviour of British banks, which helps explain the rapid growth of non-interest income during the last two decades. We also find that the consumer faced high switching costs in the loan market in the latter part of the sample period, as a result of lower competitiveness.

ABSTRACT: This paper provides a comprehensive econometric framework for the empirical analysis of countervailing power. It encompasses the two main features of pricing schemes in business-to-business relationships: nonlinear price schedules and bargaining over rents. Disentangling them is critical to the empirical identification of countervailing power. Testable predictions from the theoretical analysis for a pragmatic reduced form empirical pricing model are delineated. This model is readily implementable on the basis of transaction data, routinely collected by antitrust authorities and illustrated using data from the UK brick industry. The paper emphasizes the importance of controlling for endogeneity of volumes and established supply chains and for heterogeneity across buyers and sellers due to intrinsically unobservable outside options.

ABSTRACT: We describe three different extensive data sets on the Swiss market for basic health care insurance—a homogeneous product by construction. First, we provide descriptive statistics on market prices for period 2004 - 2010. Second, we present aggregated data on health plan choices made by Swiss residents in the same period. Third, we describe and analyze an extensive survey executed in 2009 which documents health care plan and insurer choices of enrollees as well as their switching behavior. Price data reveal an increase of the mean price level and substantial and persistent price level differences across regions. We also observe a steady increase of price dispersion; contemporaneously, enrollees face an increasing number of operating companies. Indeed, we find a strong positive relation between regional price dis- persion, the regional price level and the number of operating companies. Although enrollees have moved to le! ss expensive health care plans, our aggregate and survey data point to insuf- ficient price optimization on the part of the enrollees. Aggregate data disclose an increasing gap between the premia paid by enrollees and the lowest premia available in the respective submarket. Moreover, Swiss residents could have paid less on average if they had chosen their insurer randomly. Our Survey data confirm this observation: Despite large potential monetary gains, only 20% of the enrollees did switch their insurance company by the end of November 2009. In addition, many enrollees switched to more expensive insurance companies, thereby incurring negative monetary benefits.

Emanuela Ciapanna (Banca d'Italia) and Concetta Rondinelli (Banca d'Italia) have written on Retail sector concentration and price dynamics in the euro area: a regional analysis.

ABSTRACT: We conduct a regional analysis of the relationship between market concentration and price dynamics in the grocery retail sector, focusing on a sample of five categories of goods belonging to the 12 COICOP aggregation and on a panel of countries that includes Germany, Spain, Finland, Italy, Austria and Portugal. Using a unique census-type dataset on retailers, we construct Herfindahl-Hirschman indices of concentration at the buying group, parent company and individual shop level for a sample of 118,540 large grocery stores and we study the association between these measures and regional price changes. Our results point to a positive association between retail market concentration and price growth in food and beverages, alcohol and tobacco and miscellaneous goods in the time span 2003-2010 at the buying, parental group and store level for the pooled sample of countries. The relation reverses sign for clothing and footwear and household equipment. This evidence is robust to different specifications of concentration indices.

ABSTRACT: Hooray, hooray, hooray! The Federal Trade Commission and Department of Justice Final Statement of Antitrust Enforcement Policy Regarding Accountable Care Organizations Participating in the Medicare Shared Savings Program,1 issued on October 20, 2011, jettisons the requirement of the previously issued Proposed Statement 2 that certain accountable care organizations obtain a favorable antitrust review letter from the FTC or DOJ as a condition to participating in the Medicare Shared Savings Program. Without question, this was the most criticized aspect of the Proposed ACO Antitrust Policy Statement that the federal antitrust agencies issued on March 31 of this year. Many of the 127 public comments filed in response to the proposed Statement 3 argued that the requirement turned the agencies into regulators rather than law enforcers and was not needed to ensure detection of ACOs exercising market power. In addition to this major and welcome change, the Final ACO Antitrust Statement includes subtle changes from the Proposed Statement, most of them for the better and many of which likely resulted from public comments invited by the antitrust agencies. All in all, the antitrust agencies did an excellent job fulfilling a difficult mandate—crafting a “one-size-fits-all” statement that nevertheless provides helpful guidance in varied factual situations.